When Should You Seek Outside Funding For Your Start-Up?

It is up to the founders to decide whether their ultimate goal is to either build a "lifestyle" business (i.e. a private source of income that will hopefully endure at least until they retire) or a start-up (i.e. a business that grows exponentially and leads to an acquisition, IPO or buyout). Or it can die out.

In the case of a “lifestyle” business, any investment you take is basically a loan that you have to repay later. If you can build a lifestyle business without a loan, then you should not take one out.

If you’re planning to build a start-up, the question you need to ask yourself is not if you should seek investment but, rather, when you should seek investment. It’s important that you correctly time your fundraising.

If you seek funding too soon, you will most likely waste your efforts. That’s because investors won't risk entering your company when it’s immature. Even if you do find an early investor, you risk scaling your company before it’s ready to grow — an event that can kill even the strongest startups.

On the other hand, if you seek funding too late, you risk being overrun by your competitors and potential copycats, who will likely have secured funding before you. You can hope that they will fail, make an exit or become big enough to acquire you, but that's a huge risk to take.

Additionally, you should consider than an investment is one of the ways to determine the valuation of your business, and an accurate valuation is the key to a good exit. In fact, Instagram and WhatsApp made very large rounds shortly before acquisition to boost their valuation. I can't think of a single startup that made any substantial exit without investment.

So far, I've been part of two start-ups that tried to raise a seed round. Both attempts came too soon. They had working prototypes but no customers. Naturally, the start-ups were both a waste of time. In fact, they felt more like "Groundhog Day". You arrange a meeting with potential investors and spend days preparing a slide deck, but when it comes time to make your pitch, you don’t have good answer to investors’ questions. They’ll tell you that your start-up looks interesting and that they’ll get back to you, but the reality is that your start-up with no customers will never rarely a call back from investors.

The investors who do get back to you will say something along the lines of, "We need more time to think" or "We want you to meet with this expert and convince him.” Eventually, these investors will all disappear as you chase them for months.

The first time this happened to me, I was too inexperienced. I thought I could hit the jackpot if I put in enough effort. I was wrong. When I started my second business, my partner was the one who was too inexperienced. It took me six months to convince him to stop wasting time.

So, for someone with a very good idea, but a very green business, I would recommend to pass on raising money until you have solid case to do so. What does that mean? You need to have undeniable traction, growing revenue, profitability and a perfect understanding of how much money you need, why you need it and what you’re going to do with it.